BANKS AND SAVINGS & LOANS

BANKS AND SAVINGS & LOANS. During the canal era Cleveland was an intermediary center of trade and commerce, and as the network of railroads displaced canals as a more reliable form of transport, the city became an industrial center. The growth of diversified financial services to facilitate the production and exchange of goods paralleled that of the economy; however, the existence of larger money centers in New York and Chicago limited the expansion of local banking to the midwest region it served.

As Cleveland grew from an agricultural outpost in the Northwest Territory to a center of trade and transshipment, the village economy and the hinterland it served gradually lost its local character as its population increased, and banks were organized to facilitate commercial transactions that were increasing in number and scope. Although the War of 1812 helped make Cleveland a trading center, barter still governed most exchanges of goods because specie (hard money made up of gold and silver coins) was scarce and paper money was of dubious value. The city's emergence as a commercial center still was uncertain when its first bank, the COMMERCIAL BANK OF LAKE ERIE opened for business 6 Aug. 1816, extending credit to merchants, making real estate loans, and issuing its own bank notes as currency. It was during the nation's canal-building period that Cleveland's position as a provincial center of trade was established. The Erie Canal, completed in 1825, opened Great Lakes shipping to the eastern seaboard, and the OHIO AND ERIE CANAL, finished in 1832 with Cleveland as its northern terminus, linked Ohio River traffic and the interior of the state to Lake Erie. With Ohio connected with the eastern seaboard via the Erie Canal, commerce expanded into areas essentially bypassed in earlier good times, creating a need for banking services. Initially Cincinnati, which benefited from increased river traffic, was the state's major commercial and banking center. In 1836 its 5 banks represented a total capital of $4,108,200, in contrast to Cleveland's 2 banks, which had a total capital of $659,200. By 1901 the roles were reversed: Cleveland's 46 banks had capital totaling $33.8 million, far ahead of Cincinnati's 19 banks with $16.5 million.

While the canal openings improved the distribution of produce and expanded trade, a severe panic in 1837 and a subsequent depression tested the soundness of Cleveland's infant banking system. During the panic, commodity prices sank, and the two local banks were unable to collect on their outstanding loans. The Bank of Cleveland collapsed and the Commercial Bank of Lake Erie was forced to suspend specie payments for a year, before losing its charter in 1843. The small amount of specie circulating in Cleveland consisted mainly of foreign coins--English, Spanish, and Mexican. The fragility of local banking systems was due to the imbalance between the large amount of paper bank notes in circulation, which had no intrinsic value, and the shortage of specie, which did--a circumstance that fostered public distrust of paper money as a medium of exchange for goods and services.

The commercial depression and the chaotic money system slowed Cleveland's economic development, and between 1842 and 1845 the city had no bank to provide a safe place for savings or to provide the capital necessary to make temporary loans. Exchange brokers and insurance companies, such as the Fireman's Insurance Co. of Cleveland, which had banking and note issuing privileges, were the only fiscal agents offering banking services. The vagaries of early banking in Cleveland reflected the state of banking in Ohio. Still dependent on the agricultural economy, many Ohio banks suspended specie redemption during the panic of 1837. 9 banks failed and 15 more did not have their charters renewed in 1843, including the two in Cleveland.

The Ohio legislature provided some relief from the financial disorder with the Ohio Banking Act of 1845, which eliminated note-issuing authority for Ohio corporations other than banks, causing the Fireman's Insurance Co. of Cleveland to reorganize itself as the City Bank of Cleveland. The act also sought to compromise the differences between those that wanted a strong state banking system and those that favored a system of independent banks. As a result, Ohio had two kinds of banks, state branch banks and independent banks, and two kinds of money, that issued by the state branches and that issued by independent banks. A State Board of Control made up of representatives from each of the 63 state branch banks supervised Ohio's banking systems and furnished bank notes to the branches--two of which were in Cleveland. In order to stabilize the currency in circulation, all banks were required to maintain a specie reserve amounting to 30% of the total face value of the bank notes they issued. Ohio's banking system received its final form in 1851 when separate chartering legislation for each bank was no longer required, provided the bank met certain conditions. With these changes, Cleveland's banking facilities grew at a pace commensurate with its expanding economy, and to expedite the increased exchange of checks among member banks, the CLEVELAND CLEARING HOUSE ASSN. was organized in 1858.

With its banking system stabilized, the city made the transition from a commercial to an industrial economy, fueled by the growth of railroad transportation, and in the 1850s the railroad boom initiated the city's metropolitan growth. New banks with stronger capitalization succeeded those that were defunct as banking and finance became more complex. The resources available in state banks, however, were insufficient to finance the North's Civil War effort and maintain specie redemption of notes at the same time. As a result the National Bank Acts of 1863 and 1864 established a national currency, secured by U.S. government bonds, to finance the war, and formed a system of nationally chartered commercial banks to distribute U.S. bank notes. Issuance of state bank notes ended in 1865 when Congress taxed them out of existence. Without note-issuing privileges, state and national banks continued to exist side by side as banks of deposit. With the creation of a national currency, the value of paper money was stabilized.

In the 19th century Cleveland banking grew, as did its economic development with a rapid increase in the number of banks and in the total deposits on hand. At the same time banking itself became more diversified in its organization and the services it offered. The early Cleveland banks had been organized by groups of investors who expected a return on the capital supplied for their operation; however, other forms of banking developed as well. Savings and loan (or building and loan) associations, authorized by the State of Ohio in Aug. 1868, played a major role in promoting local home ownership by financing home mortgages and making loans to neighborhood businesses. Popular with the city's ethnic groups, who placed a high value on home ownership, S&L's such as the German-American Savings Bank and the Warsaw Savings & Loan were organized to serve the immigrant communities. Another form of banking was the state-chartered trust company, promoted by bankers to circumvent the regulations established in the mid-19th century to stabilize the banking systems. Legalized in Ohio in 1883, its purpose was to accept and execute trusts, act as a trustee for wills, bond issues, and estates, in addition to engaging in general banking business. Under the relaxed rules, trust bankers exercised greater investment decision-making over money on deposit and the property and funds in the trust accounts they controlled. Established in 1894, the Cleveland Trust became a powerful economic force in the city through its activities as an estate trustee. The extensive stock portfolios and real estate it managed gave the bank significant influence in the business of the greater Cleveland area and beyond.

After the Civil War Cleveland's conservative banking establishment, dominated by descendants of the original New England settlers, was anxious to link Cleveland growth industry to its source of raw materials and distribute the finished products it produced to national markets. Local financial institutions helped underwrite the expansion of numerous small railroads serving the area; however, the tenuous finances of these undercapitalized roads were particularly affected as panics in 1873, 1884, and 1893 depleted the funds available for expansion. As a result, they underwent a series of bankruptcies, reorganizations, and consolidations in their search for additional capital (more readily available in the larger money centers of the country). By the early 20th century, viable railroads such as the NEW YORK CENTRAL, BALTIMORE & OHIO, and PENNSYLVANIA, owned by eastern business interests, provided Cleveland with a reliable and efficient transportation system, connecting the city with the necessary elements of an industrializing society.

The parallel growth of Cleveland's economy and its regional banking system produced a match-up which ensured that much of the credit needed by business could be readily supplied. Initially, credit arrangements were made between bankers and entrepreneurs through personal networks which evolved through repeated business transactions. As a young commission merchant, JOHN D. ROCKEFELLER became well known to local bankers TRUMAN HANDY, DANIEL EELLS, and STILLMAN WITT. Impressed with his business skills and his record of loan repayment, Rockefeller's credit history made them his allies when he needed capital to establish Standard Oil. JEREMIAH SULLIVAN, founder of Cleveland's Central National Bank, was fond of recounting the story of pioneer automobile salesman GEORGE PECKHAM, who lost his only dealership in the 1913 Dayton Flood and was heavily in debt. Convinced of his business acumen, Sullivan helped finance Peckham's purchase of the Cleveland Buick franchise, which became one of the largest in the state. Loan decisions by personal contact became more difficult when the increasing volume of trade and the geographic growth of markets required banks to do business with a greater number of strangers. As a result, banks came to rely on credit reports prepared by others in their financial transactions, and loan decisions were made by committee, based on these outside credit evaluations.

Growth in Cleveland banking was momentarily interrupted by the Panic of 1907-08, which reduced bank deposits in the city by some $32 million, a sum that was not recovered until 1911. The panic demonstrated that the 19th century problems of an inelastic currency and the concentration of money reserves in a few large banks had not been solved--a central mechanism was needed to adjust the quantity of money to meet the shifting demand. Congress authorized the formation of the Federal Reserve System in 1913 to regulate the supply of money to match the need and to protect the banking system from further convulsions. Through its 12 district banks, the Federal Reserve provided additional reserves to its member banks as needed and had the tools to maintain the elasticity of the money stock by manipulating the currency flow when the occasion called for it. The fourth Federal Reserve district encompassed Ohio, western Pennsylvania, and northern parts of Kentucky and West Virginia, and Cleveland and Pittsburgh vied with each other to become the district headquarters, with each one's Chamber of Commerce leading the charge. Cleveland's committee included Warren S. Hayden, president of the Chamber of Commerce, Jeremiah Sullivan, president of the Commercial Clearinghouse at the time, ELBERT H. BAKER, head of the Plain Dealer Publishing Co., Mayor NEWTON D. BAKER, and FREDERICK GOFF, president of Cleveland Trust. The balance tipped in Cleveland's favor because of its growth: in population, in the value of its manufacturing, and in the total amount of its bank deposits, it exceeded that of Pittsburgh, signifying the city's emergence as the dominant regional banking center in the area.

There was a steady consolidation of Cleveland's banking establishments into larger, more comprehensive financial institutions throughout the period 1890-1930 as shown in the table.

In Cleveland a dramatic merger of 29 local financial institutions took place in 1920 to form the Union Trust Bank, making it a major lending institution and the lead bank in providing local financing for the VAN SWERINGEN railroad empire. There was an equally important increase in the amount of bank deposits, with Union Trust ($312,331,370), Cleveland Trust ($288,760,760,508) and Guardian Trust ($152,945,504) leading the rest in 1930. Impressed by the Van Sweringens' expansive vision of Cleveland's physical development, which was unfolding before their eyes, banks appeared to see only the short-term risk associated with the pioneer auto makers and aviation enthusiasts operating in Cleveland. The long-term potential of these industries was obscured, even though the WINTON MOTOR CAR CO. had demonstrated that automobiles could be manufactured in quantity.

While the Federal Reserve system worked well enough during the prosperous 1920s, it vacillated on using its authority to stimulate the economy at the onset of the Great Depression. As the Depression deepened, loan defaults grew, depleting the resources of the nation's financial institutions, and nervous Americans made runs on the banks to salvage their threatened savings. In Cleveland the Union Trust and Guardian Trust permanently closed after the 1933 bank holiday due to misappropriation of bank funds for speculative purposes, insider loans by the banks' officials, two of whom went to jail, and the bankruptcy of the Van Sweringen brothers, who had outstanding loans in both institutions. Of the 3 leading banks in 1930, only Cleveland Trust was solvent and liquid enough to reopen after the bank holiday. The sudden closing of the two institutions shocked the Cleveland community as the extent of the peculations was revealed. The 1934 figures in the above chart show that only 8 banks remained in the city, with half the total deposits on hand 4 years earlier, documenting the impact of the Depression on the city's banking community.

To alleviate the nationwide banking crisis, the Glass-Steagall Act, passed by Congress in 1933, separated commercial from investment banking, imposed severe restrictions on the use of bank credit for speculative purposes, and set up a permanent regulatory framework to enforce it. The act also established the Federal Deposit Insurance Corp. to insure deposits up to a fixed sum, and provided for more rapid use of the Federal Reserve as the lender of last resort in a crisis. The timely reform of the nation's financial sector significantly reduced bank failures. Under the new regulatory umbrella, Cleveland banking recovered and prospered, establishing branch banks and offering new services, but remained cautious in lending policies. New institutions, such as Third Federal Savings and Loan, were also organized during this period.

After World War II, Cleveland's banks followed the population into the rapidly growing suburbs, expanding branches into the multiple shopping areas springing up and competing with each other for depositors' money and loans. With the explosion of new housing and federal guarantees of home mortgages, the local savings and loan industry thrived. Broadview Savings & Loan had become the largest S&L in Ohio by 1956, with more than $97 million in assets. The growth of branch banking outside Cleveland challenged the existing restrictions of Ohio law, which confined local banking operations to Cuyahoga County. In the 1970s the law was liberalized, giving multi-bank holding companies the right to establish affiliates throughout the state by organizing them as individual corporations within their home counties. An exchange of a state bank charter for a federal one then permitted holding companies to expand outside the state as well. Locally, Ameritrust Corp. (Cleveland Trust), Society Corp. (Society for Savings), and Transohio Financial Corp. (Transohio Savings Bank), among others, were quickly organized as holding companies to extend their operations throughout the state and beyond. Conversely, for the first time major banks with headquarters outside Cuyahoga County, such as Huntington Bancshares of Columbus, Star Bank of Akron, and Dollar Bank of Pittsburgh, entered the Cleveland market, competing with local institutions for customers. For example, BancOhio National Bank of Columbus, Ohio's largest holding company in 1972, took over Capital National Bank, Cleveland's 6th largest bank, and the merged banks in turn were acquired by the National City Corp. of Cleveland (holding company of National City Bank) in 1980.

Cleveland banking was scrutinized by the national media in the late 1970s, when 6 of its major banks, who held short-term notes owed by the City of Cleveland, precipitated a financial crisis. Some $14 million of these short-term notes came due 15 Dec. 1978, and when the administration of Mayor Dennis Kucinich was unable to pay off the loans, the 6 lenders refused to roll them over. Their action, politically motivated in part, forced Cleveland to default on its financial obligations. Although greatly criticized by the city administration and others, the banks' refusal served to highlight the city's chronic inability to generate enough revenue to pay its bills and the critical need to augment its income through increased taxes--an issue past mayors and city councilmen had failed to address effectively for many years.

In the 1970s the Depression-born restrictions on interest rates that financial institutions could offer depositors became burdensome. Banks and savings and loans had difficulty competing with the growing number of unregulated money market mutual funds offering high interest rates to attract depositors. Seeking to level the competitive playing field in an era of rapid inflation, Congress passed the Depository Institutions Deregulation and Monitory Control Act (1980), lifting the ceiling on the interest rates they could offer on savings and other demand deposits. The act also increased the amount of federally insured deposits from $40,000 to $100,000 per account and abolished or modified state government usury ceilings on mortgage loan interest rates. The Garn-St. Germain Act (1982) permitted savings and loans to make commercial real estate and consumer loans for the first time, reducing their dependence on long-term mortgage loans which tied up capital. The amount of capital they were required to have on hand in order to undertake certain investments also was reduced, freeing up additional loan funds. Unaccustomed to this new deregulated national market, which encouraged price and product competition, many S&L's became involved in questionable investment schemes, creating an industry-wide financial crisis which Cleveland's local savings institutions did not escape.

Like financial institutions elsewhere, local banks and S&L's were offering higher interest rates, in the range of 14-16%, to meet competition in the late 1970s and early 1980s. In order to meet the escalating interest payout, it was necessary to make loans at even higher interest rates to generate sufficient income--the prime lending rate reached 21 1/ 2% in December 1980. Real estate loans provided a particularly attractive investment after the Economic Recovery Tax Act of 1981 lowered the tax liability for those who invested in them. Armed with the knowledge that depositors money was protected up to $100,000, some Cleveland financial institutions went into the business of selling money wherever there was a demand for it in order to increase their loan portfolios. In areas such as Florida, Texas, and the southwest, where they had little real knowledge of local conditions, loans were made on marginal investments which carried a high element of risk. As loan repayments lagged, the liabilities of these institutions grew, gradually exceeding their assets, and they lapsed into bankruptcy. Unwise real estate loans and other speculative endeavors were in large part responsible for greater Cleveland's bank and savings and loan failures, although the Cleveland experience was a relatively small part of the nationwide crisis in the savings and loan industry.

Congress came to the rescue when Federal Savings & Loan Insurance Corp. (FSLIC) funds were exhausted in its attempt to pay off depositors in the failed institutions. The Resolution Trust Corp. (RTC) was established in 1989 to take over troubled thrifts and dispose of their fixed assets and loan portfolios, which had to be sold at bargain prices to attract buyers. Locally, Broadview, with $1.8 billion in assets, and Transohio, with $4.5 billion in assets, were the largest local S&L's to go bankrupt and be taken over by the RTC. In the growing number of other local acquisitions, such well-known names as Central National, Cardinal, and Women's Federal also disappeared from the banking community. The local concentration of bank assets through merger took a quantum leap with the decline of Ameritrust, potentially the largest bank failure in Cleveland's history, which was taken over by Society Corp. in Sept. 1991. However, prudent financial institutions could profit from RTC sales. Cleveland's Charter One Financial Corp. bought up the best of Broadview's assets and by 1993 had become the area's dominant savings and loan. That year Cleveland's National City Corp., Society Corp. (Key Corp), and Bank One of Columbus, with assets of $31 billion, $59.6 billion, and $79.9 billion, respectively, were Ohio's largest regional banking institutions and were expanding their operations nationwide.

Cleveland banking had begun as a tenuous localized endeavor, far from the money centers of the eastern seaboard, and grew in numbers and diversity during the 19th century in spite of the instability of fluctuating currencies and periodic panics. With the prosperity of the city's commercial and industrial economy assured, banking consolidations produced fewer but stronger financial institutions in the first 3 decades of the 20th century, and Cleveland was recognized as a regional financial center when the Federal Reserve system established its fourth district headquarters here. The overcommitment of local banking resources during the 1920s, which resulted in the failure of two major institutions during the Depression, reinforced the caution of the surviving banks and savings and loans. The post-World War II geographic deregulation of banking created a national market for their endeavors, but also created competition from banking institutions headquartered outside the city who established offices in the Cleveland area. The consequences of financial deregulation in the 1970s and 1980s and the surge of real estate lending caused a local debt crisis, although greater Cleveland did not experience the numerous bank insolvencies that occurred in other areas. In the 1990s, Greater Cleveland had fewer regional banking institutions; however, those that survived were seeking a national presence.